Global shares firm, dollar steady before Fed decision

Richard Hubbard

5 Min Read

A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS/Suzanne Plunkett

LONDON (Reuters) - World shares edged higher while major currencies and commodities stayed within recent ranges on Wednesday as investors nervously awaited a decision on the U.S. Federal Reserve’s next move.

The Fed’s rate setters are expected to leave policy ultra-loose following the central bank’s monthly meeting but may hint they will start scaling back its bond buying later this year if the U.S. labor market continues to improve.

Fed Chairman Ben Bernanke’s comment last month that the U.S. central bank could begin to curtail bond purchases at one of its “next few meetings” rocked financial markets.

“The market is very nervous,” said Oliver Roth, head trader at Close Brothers Seydler.

“For investors, I would say that they should be careful and set their limits - especially stop limits - very carefully, because if there is some change coming up for the Fed policy then there could be a dramatic drop for the market.”

The policy-setting Federal Open Market Committee will announce its decision at 2 p.m. ET, followed 30 minutes later by a news conference with Bernanke.

Speculation about when and by how much the Fed could taper its $85 billion a month of bond purchases has supported the dollar against emerging and growth-linked currencies, although uncertainty over the impact of any policy shift has led some investors to prefer the yen or the euro.

The dollar shed 0.2 percent against the Japanese currency on Wednesday to trade around 95.10 yen, but was steady against the euro near $1.34 after the single currency touched a four-month high on Tuesday.

Against a basket of major currencies .DXY the greenback was holding steady at around 80.64.

“The general elements for a stronger dollar are in place, on the back of the prospect of tighter U.S. monetary policies,” said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered Bank. “Maybe it will get another shot in the arm (from the Fed), maybe it won‘t, but rushing to judgment is probably going to be a mistake.”

SHARES EXPOSED

Trading was choppier in equity markets, where many major indexes have hit new records this year due to the liquidity injections from major central banks, making them vulnerable to any scaling back in the flow of funds from the Fed.

The widely watched S&P 500 index .SPX is just 1 percent below its all-time closing high and stock index futures point to a potential test of this later if the Fed says anything to temper expectations of an early cut-back. .N

“The Fed’s tone will clearly influence the action. If Bernanke indicates that tapering is quite a bit of a distance off, investors will feel relieved and equities can revisit their recent highs,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

Japanese stocks bucked the softer trend in Asia, closing up 1.8 percent .N225 to reach a one-week high, as data showed Japan’s exports rose in May at their fastest annual rate in more than two years.

The MSCI world equity index .MIWD00000PUS, tracking shares in 45 countries, added 0.15 percent to bring its gains this week to 1.2 percent as the Fed’s announcement has approached.

In the debt markets, German Bund futures kept within narrow ranges before the Fed decision and saw little reaction to a 4 billion euro sale of new 10-year bonds. <GVD/EUR>

Ten-year German bonds yielded 1.55 percent, up around 40 basis points since the beginning of May, mirroring a rise of about 50 bps in equivalent U.S. Treasury yields over the same period.

In cautious commodity markets, growth-linked metals like copper, as well as safe-haven and inflation-linked assets such as gold, were restricted to minor moves.

Three-month copper on the London Metal Exchange rose 0.1 percent to $7,012 a tonne, though this was not far off its lowest price since early May.

“Base metals have been struggling as portfolio managers and investors have been cutting their exposure to commodities,” said Victor Thianpiriya, commodities strategist at ANZ Bank.

Brent crude held above $106 a barrel, near an 11-week high, as hopes for ongoing Fed stimulus underpinned prices.

U.S. crude for July delivery touched a nine-month high of $99.01, before easing to $98.75, still up 31 cents.